Provisional patent applications are the worst things for angel investors.
What is a provisional patent application?
A provisional patent application, sometimes called a “provisional” or “PPA,” is the single worst thing a startup can do to “protect” themselves. And angel investors have been led to believe that this is a good strategy.
Angels who tell entrepreneur to get a provisional patent application
As part of my angel investor group, I participate in many due diligence teams. Recently, we were doing due diligence on a computer security company. The company’s business was to out-smart hackers with some very clever technology.
I was shocked to see that the company had filed a patent on their technology, so I asked the CEO about it. He said that he did not want to get a patent, but an angel investor asked them to.
I explained that the patent explained all of their “secret sauce.” If the patent was published, not only would their competitive advantage be wiped out, they would have given the hackers the blueprint for how they would get caught.
Thankfully, the company’s patent application had not yet published, so we intentionally abandoned the patent application before the secrets were let out.
I have seen this happen time and time again.
Entrepreneurs have asked for patent advice, and I have pleaded with them to *not get a patent.* I explain that their algorithm would be easy to copy and impossible to enforce. I point out that their manufacturing methods are all done behind closed doors and a patent would never be detectable – even if the infringing competitor was next door to them.
Yet, I hear, over and over, that they are terrified that an angel investor would ask if the entrepreneur has a patent.
A Shark Tank patent is worthless
I had the opportunity to chat with a former Shark Tank inventor. He was on the program and got an offer for investment, but curiously, the investment was never finalized almost a year later when he and I talked.
On the show, one of the “Sharks” often asks “do you have a patent?” To which the budding entrepreneur happily replies: “Yes!” And the bidding war begins.
As I looked over the entrepreneur’s patent, there was a curious thing: the inventor’s name was different. Part of the entrepreneur’s story is how he solved this problem, came up with a solution, and got a patent. But his name was not on the patent.
I asked him about it.
“That’s my uncle. He gave me the money for the patent, so I put his name on it as the sole inventor.”
Of course, this generous offer to his uncle made the patent completely worthless. It is fraud to sign that you are the first and true inventor when, in fact, you are not. This simple fact makes the patent unenforceable.
Nobody told the inventor that putting his uncle’s name on the patent would invalidate it.
I suspect that during the due diligence from the Shark Tank episode, someone uncovered this dirty little secret, which is why he never closed on his funding.
My patent is not even worth $500! But I want you to think it is worth millions!
What does it mean to get a provisional patent application? It is a huge red flag that the entrepreneur (1) does not know what they are doing or (2) does not believe in their invention. Neither option is very good.
Every single patent application, provisional or non-provisional, must have the exact same language, figures, and explanation for how to practice the invention. The provisional and non-provisional patent applications are *exactly the same.*
The only difference between the two types of patent applications is checking the box between provisional or non-provisional.
The cost difference is about $500. (Non-provisional filing fees are about $600 and provisional filing fees are about $100.)
If the patent has value to the entrepreneur, the entrepreneur would of course make the investment. However, when an entrepreneur files a provisional application, this is a huge red flag.
The entrepreneur’s actions are saying “I don’t believe this patent is worth an extra $500 investment!”
At the same time, the entrepreneur is trying to convince an angel investor to give them hundreds of thousands, if not millions, of dollars.
Angel investors keep falling for this charade, and they sometimes perpetuate it by asking for patents, even when the patents damage the company.
“Provisional patent applications help me ‘save’ money”
Many entrepreneurs say that they use provisional patent applications as a way to “save” money. This is a well-worn excuse for patent attorneys to take advantage of innocent inventor/entrepreneurs by selling a “thin” provisional, then coming back a year later to force the inventor to pay for a “full” patent application.
The entrepreneurs do not realize that their “low cost” provisional provides no protection because it never meets the requirements of a complete disclosure.
Entrepreneurs think they are “patent pending” so “nobody can steal my idea,” and they start telling the world about it.
At the same time, they are losing all international rights to their invention.
If the patent was really worth the millions of dollars the entrepreneur thinks it is, why would they ever delay getting a patent by the provisional route?
Wouldn’t the entrepreneur want the patent faster, rather than slower?
The sooner they get a patent, the more their company would be worth. The more money they can raise, and at a higher valuation. The more leverage they would have with a strategic partner, the more opportunities they would have to license their technology.
If the patent was going to be valuable, why would they ever delay getting a patent?
As an aside, BlueIron will finance the cost of these patents – only if the patents were valuable.
If the strategy was to save money by delaying the patent filing, why not just wait a year to file the patent, rather than take precious time, money, and brainpower away from growing the fledgling company?
In almost all cases, the best patents are yet to come. So there is no rush to get a patent early.
If patents are worth doing, they are worth doing right. If they are not worth doing right, you should avoid it.
Provisional patent applications are only for gullible investors.
The gullible investors who ask about patents and accept provisional patent applications are doing themselves, the entrepreneur, and the ecosystem harm.
Intelligent investors ask “what is your IP strategy?” or “do you have a moat against competitors?” They never ask questions that presume an answer.
Good angel investors should be investing because they believe the entrepreneur will be a good steward of capital. They should invest because the entrepreneur is making good, logical business decisions.
If the entrepreneur has a thoughtful strategy for anything, be it marketing, sales, manufacturing, or intellectual property, the investor needs to accept that.
Any time the angel investor presumes that the entrepreneur should take one course of action or another (such as getting a patent), they are handcuffing the entrepreneur. And they are doing it to their own detriment.
A good angel investor has to trust the entrepreneur to research the situation, think through the options, and come to a reasonable decision. An angel investor may be able to provide guidance, be a sounding board, or lend them some valuable experience, but let the entrepreneur make the decision.
Angel investors are not going to be present every minute of every day to help the entrepreneur decide. They need to feel confident that the entrepreneur has a good *process* for making decisions, more so than arrive at the same conclusion as the angel investor would have.
IP is no exception to this rule.
If an entrepreneur feels that the patent system is not a good fit for their business, the angel investor must be willing to accept that answer.